Leuthold: EM as a tactical holding

David_Snowball

Leuthold makes the case for looking at a tactical allocation to EM.

We’ve never shared the secular enthusiasm for EM equities professed by many of our peers, but we try not to let our bias blind us to tactical opportunities. Emerging Markets trade at a little more than half of the S&P 500’s normalized P/E (14.2x versus 27.0x), despite matching the mighty NASDAQ 100 over the last three months. We can’t think of any other major pocket of value with that type of momentum.

Over the past 3 months, Vanguard EM and the NASDAQ composite have both risen 21%.

Just food for thought.

David

Old_Skeet

According to Instant Xray, about 8% of my equity allocation is invested in emerging markets with both my emerging market funds (DWGAX & NEWFX) being up better than +20% each over the past rolling 90 days. In addition, I have a good number of equity funds that are bettering the +20% mark as well. So, it is not just emerging markets that are (or have been) on the upward move as there are some others as well.

My three best 90 day leaders are AOFAX +25.43 ... SMCWX +24.43 ... and, FISCX +24.37.

Rbrt

Stole this from The Balance -
“ Emerging Markets List
The Morgan Stanley Capital International Emerging Market Index (MSCI Index) lists 26 countries. They are Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates.

Other sources also list another eight countries as falling into the emerging market category. They include Argentina, Hong Kong, Jordan, Kuwait, Saudi Arabia, Singapore, and Vietnam.

The main emerging market powerhouses are China and India. Together, these two countries are home to over 35% of the world's labor force and population. In 2018, their combined gross domestic product (about US$28.1 trillion) was greater than that of either the European Union ($18.8 trillion) or the United States ($20.5 trillion). In any discussion of emerging markets, the powerful influence of these two super-giants must be kept in mind.”

I wonder if an investor would be wise to be select some countries and rule out others?

Old_Skeet

Hi @Rbrt,

Thanks for posting a list of the countries that are considered to be emerging markets. It seems, to me, investors would be wise to make emerging markets a core holding within their portfolio just for the organic growth that would come from these countries as they grow their economy. I know I have with two emerging market funds. In addition, I have other funds that from time to time hold emerging market exposure from a tactical perspective. Having this combined strategy provides me the emerging market coverge, both from a organic and tactical growth perspective, that I seek.

Thanks again for posting the emerging market country list.

Old_Skeet

MikeM

I hold, Leuthold Core ETF, LCR, and it has very little EM in it as of 6/30. It's a pretty conservative balanced portfolio very similar to LCORX. I don't think it holds more than a couple % EM equities. So what they are saying isn't reflected in their core fund.

FD1000

If you look at Vanguard VFIAX, its PE=23.1

The top 4 companies in the index EEM are high tech ones and 22% of this index
Alibaba Group Holding Ltd ADR
Tencent Holdings Ltd
Taiwan Semiconductor Manufacturing Co Ltd
Samsung Electronics Co Ltd

msf

EM countries are not a well defined class. You have to decide which collections of countries you're interested in when you select an "emerging markets" fund, whether active or passive.

Obviously, the inclusion or exclusion of smaller economies won't make a big difference in investment performance. But whether one includes a country like Korea can have a sizeable impact. David Snowball writes: "Over the past 3 months, Vanguard EM and the NASDAQ composite have both risen 21%."

VEMAX tracks a FTSE index that excludes Korea. Over the past three months (through July 24), VEMAX returned 22.07%, while FPADX, tracking the MSCI EM index including Korea returned just 21.37%. It should be noted that each underperformed its respective benchmark by almost a half percent.

The S&P Emerging BMI index (see Appendix A) has the same countries as the MSCI index except it excludes Korea. The NASDAQ index likewise excludes Korea but also excludes several other countries. (See p. 25 of the NASDAQ methodology.)

Here's a 2016 piece, in part explaining Why South Korea Remains Classified As An Emerging Market by MSCI.

I appreciate @Rbrt 's giving the source of the quoted material. A link would be even more helpful. With that, one can check how current the text is (the MSCI data is current). This matters because indexes periodically add and drop countries. Also, this enables one to see that the paragraph about "other sources" was direct from The Balance.

That paragraph doesn't have any footnotes giving sources. Worse, the paragraph says that these are another eight countries. But two of them (Argentina and Saudi Arabia) are not additional. Even with these, only seven countries are named (assuming Hong Kong can be regarded as a separate country). Given that MSCI moved Argentina and Saudi Arabia from Frontier Markets to Emerging Markets in May 2019, their continued presence in the paragraph could be the result of poor editing. I don't have a guess as to which other country was dropped, since the page doesn't give sources.

The bottom line is that EM is to some extent whatever you think it is. Given that, one must be careful in comparing returns, or even saying what's included in "the" index.